Burns: There's more to owning a home than its purchase price

May 22, 2016Updated: May 22, 2016 10:48pm

Photo: Lee Woodgate, Contributor

Q: Your columns about reverse mortgages have me intrigued. I recently retired and find myself with a paid-up $100,000 house. I also have cash and IRAs worth over $2 million. Now I want to move to an area where housing is much more expensive.

Would it make sense - or be possible - to buy a $700,000 house with $400,000 down and then take out a reverse mortgage to help pay for the house? Would there be a benefit in that for me? I really don't want to deplete my nest egg by $700,000 to buy a house. What should I do?

- D.B., by email

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A: By any measure I know of, you have less money committed to shelter than the vast majority of our population. So it is altogether reasonable for you to consider owning a house that is more valuable than $100,000.

If you are at least 62, you could buy a $700,000 house using a purchase-money reverse mortgage. It would require a down payment of about $350,000. And you never make a mortgage payment. So, yes, you can do that.

But before you do, you should examine the ramifications and consider your other income sources. Today you're living in a house that probably has out-of-pocket annual costs of about $5,000, even though it has no mortgage. When you move into a $700,000 house, the annual operating costs will be significantly higher, perhaps $28,000.

So you'll be improving your shelter, but you'll also be forcing a major reduction - at least $23,000 - on what you could spend for other living expenses. The actual reduction in spending power after shelter will be greater because you'll have committed about $250,000 of your investments (in addition to the equity from your current home) to real estate.

Another expense you may not have considered is that furnishing a $700,000 house involves a good deal more than furnishing a $100,000 house. You can get an idea by asking an interior designer what the window treatments bill for a $700,000 house might be. Trust me, the answer will be sobering.

In the end, it's all about your personal priorities, so you'll need to do the numbers carefully before you make this big a shift.

Q: After reading your columns about reverse mortgages, I would like to offer a reason not to get one. An acquaintance took out a reverse mortgage when she was in her 70s. She has no family, no children and very limited funds. She thought she was doing the right thing to ensure she would have a place to live until she died.

She is now in her 90s and is not physically able to take care of herself. The reverse mortgage company has charged so much interest that she is now upside-down on her home. She couldn't pay back the mortgage company, so she has no asset to sell to put herself into a nursing home or hire caregivers.

I think this is the kind of thing that should be pointed out when people are considering reverse mortgages. People tend to forget that they may not be able to take care of themselves in their own home until the day they die.

- S.H., Dallas

A: You're entirely right about your acquaintance's current dilemma. But think for a moment about the circumstances under which it could have worked out better. One solution would have been for her to die much younger. Another would be to go to a nursing home much earlier. In either event, the house could have been sold and the remaining equity - a lot if her departure happened soon enough - could have been used to cover nursing home expenses or been paid out to heirs.

Instead, she lived many years, independently, in a home she wanted to stay in. Having a reverse mortgage didn't cause her to live too long.

But having a reverse mortgage did help her enjoy her independence for many years.

The issue here isn't the tool; it's that she has lived longer than her home equity could support. That can happen with, or without, a reverse mortgage.